Governments Handing Out Corporate Tax Subsidies for Video Games

Corporate taxes can be messy and complex due to the government's desire to pick winners and losers in different industries. While the U.S. has the highest corporate tax rate in the world, very few corporations actually pay the nominal 39.2% rate. General Electric, a huge winner when it comes to government subsidies, has in some recent years paid a 0% rate due to breaks and subsidies.

Sometimes a government's policy of picking winners results in amusing results. Great Britain's Chancellor of the Exchequer revealed their new corporate tax policy outline - and they're going to be giving new massive subsidies to video game developers:

2.73 Corporation tax reliefs for the creative sector – The Government announced at Budget 2012 that, following consultation on design, it would introduce corporation tax reliefs for the video games, animation and high-end television industries from April 2013, subject to state aids approval. Under these reliefs, qualifying companies will be able to choose between an additional deduction at a rate of 100 per cent of enhanceable expenditure or a payable tax credit at a rate of 25 per cent of qualifying losses surrendered.

The corporate tax code is one the most harmful ways that the government can collect taxes, and a complex, distortionary tax code is even worse. The government shouldn't be subsidizing video game development at all - it's a multibillion-dollar industry that has shown consistent growth.

The British gaming industry has possibly fallen on hard times. Team17 was a powerhouse game developer in the 1990s but has fallen on hard times. Rare Ltd. created some of the best games of all time but haven't produced anything decent in over a decade.

Because video game makers straddle the lines between software development, the entertainment industry and online retailing, they can combine tax breaks in ways that companies like Netflix and Adobe cannot. Video game developers receive such a rich assortment of incentives that even oil companies have questioned why the government should subsidize such a mature and profitable industry whose main contribution is to create amusing and sometimes antisocial entertainment.

Many tax policy analysts say the breaks for the video game industry — whose domestic sales of $15 billion a year now exceed those of the music business — are a vivid example of a tax system that defies common sense. Most times, subsidies begin as a way to nurture a fledgling industry that will not be profitable for years or to encourage a business activity deemed to have a broad benefit to society, like reducing pollution or improving public health.

Or perhaps the U.K. is trying to keep up with Canada. The Canadian government is even more generous with the subsidies - offering up to a 37.5% tax deduction.

The corporate tax code is incredibly harmful and it's only made worse when the government picks industrial winners and losers in this manner. If the British government wised up, they'd turn their backs on this misguided policy - and both the United States and Canada would follow.